Financial regulation is currently in no-man’s land, having emerged more or less intact from the House frying pan before facing the gauntlet of the Senate.
To its credit, the Obama administration has in recent weeks taken a firmer position: The excesses of the past decade have to come to an end. This was evident three weeks ago in the new proposals announced by the president to constrain the activities of large banks, which went beyond anything the Treasury Department had proposed last summer.
It was also evident in an interview that Lawrence H. Summers, the president’s chief economic counselor, gave to CNBC on Tuesday. (Ryan Grim has transcribed additional quotations.)
Asked whether the United States has “transitioned into a financial services economy,” Mr. Summers responded:
“The president’s been emphatic on what have been the excesses of the financial sector — irresponsibility, innovation that served no real purpose except the exploitation of customers — and that’s why the president’s pushed so hard for strengthened financial regulation. Look, a healthy financial system is crucial to a healthy economy, but we don’t need the kind of hypertrophy that we’ve seen in the financial system in recent years. . . .”
“We’re certainly emphasizing regulating the bankers now, not supporting the kind of irresponsible growth that we saw historically.”
This seems to represent another modest shift away from the administration’s position over the last year. The administration has repeatedly emphasized the need for better regulation — who could argue with that? — but was not closely linked to the idea that the financial sector is simply too big. The idea that some, if not most, financial innovation has served only to exploit customers is also a recent addition to the administration’s verbal arsenal. (More background on this view is here.)
The fact that Mr. Summers is doing the talking may also be significant.
Although Mr. Summers, as director of the National Economic Council, is widely believed to be the administration’s chief economic policy maker, when it comes to financial regulation the front man has primarily been Treasury Secretary Timothy F. Geithner, who has been widely perceived as being overly friendly to the banking industry. By remaining out of the limelight, Mr. Summers has preserved the ability to take a tougher line on Wall Street.
That line may be emerging now, just in time for the bruising battle ahead in the Senate.
Of course, it may amount to nothing more than a new marketing campaign designed for political consumption, intended to show that the Democrats are being tough on rich Wall Street bankers. In particular, it seems that the new size limits on banks will be designed to limit growth from this point forward— implying that our current $2 trillion banks are just fine the way they are.
Still, however, the idea that the financial sector is simply too big is a clear and welcome line in the sand.
Over the past two decades, high returns in the financial sector — for shareholders but even more so for employees — have fueled the “hypertrophy” that Mr. Summers referred to.
Not only did money flow into real estate and leveraged buyouts that would have been better invested in real productive capacity, but many smart, ambitious, hard-working people took jobs on Wall Street instead of starting new companies or inventing new products. Since 2007, we have learned that those high returns were illusory: Profits gained when assets rose in value, but were matched by catastrophic losses when the bubble finally popped.
The real question, then, is what reforms the administration will fight for that will actually shrink the size of the financial sector, since there is no evidence that the sector will simply shrink by itself.
While the sector has undergone significant deleveraging, there is no reason for it not to simply leverage up again when the opportunity presents itself. So far the administration has resisted the idea of forcing large banks to become smaller; however, if it succeeds in reducing the size of the sector without breaking up the big banks, the big banks will only have even greater market share and market power.
But now that Mr. Summers has clearly pointed out the problem, we can assess in coming weeks — as the legislative debate on financial reform intensifies in the Senate — whether the administration has a workable strategy for fixing finance.
By Simon Johnson
This post previously appeared on the NYT’s Economix and is used here with permission. If you would like to republish in full, please contact the New York Times.
The Baseline Scenario 
‘from this point forward’ translation: Wells took Wachovia; J.P. got Washington Mutual and Bear; BOA-Merril and Country(less bad assets); CITI allowed to stay alive for another day, Goldman keeps the U.S. Government, etc…
Not only were the TBTF saved by trillions, they became even bigger. Kind of hard not to think that this was the plan all along.
What a total joke. This Administration is all talk, no action.
It will be interesting to see what buffoon the U.S. votes next into Presidential office. It won’t be Obama.
More meaningless Summers-Obama crap & four bits will get you a cup of coffee at your local McDonalds. Who do think they’re kidding. Too late for more hyperbole.
It matters not if they can “talk the talk” but rather if they can “walk the walk”.
BTW:
“but many smart, ambitious, hard-working people took jobs on Wall Street”
You forgot “and ethically challenged”.
In any case, a group of people who had the choice between a job that made a difference and/or at least truly interested them and one that made a lot money, are the kind of people I don’t give a damn what their other qualities are. Clearly they are willing to sell their soul (not that I should probably talk at this point).
Yes, I know, there are plenty who do love what they do – more power to them. It’s the ones who steered themselves there over the fact that it would bring in the $$$ that I have little tolerance for. But that goes for doctors, lawyers, or any other profession that people take simply to earn more. They exist in my business as well (computers) and god I hate working with them…
I’m feeling less cynical this morning not because of anything Larry Summers said but because today is the 20th aniversary of Nelson Mandela’s release from prison. I never thought I’d see the day and yet…
Change does happen.
You’re really asking this question?
No. He’s not. Oh, and even if he was, it’s about a year too late to actually matter.
We’re on to their little game.
“…many smart, ambitious, hard-working people took jobs on Wall Street instead of starting new companies or inventing new products.”
I’ve read this line so many times in so many places, it now has been demoted to cliche.
Duh. If the end of result of “smart, ambitious, hard-working people” is the financial holocaust we’ve just gone through, then you can keep them. Put them on your trophy case, and dust them off every once in awhile, if that gets you through the day.
I’ll take stupid, lazy and slacker, please.
Mr. Johnson wrote:
“But now that Mr. Summers has clearly pointed out the problem, we can assess in coming weeks — as the legislative debate on financial reform intensifies in the Senate — whether the administration has a workable strategy for fixing finance.”
Jan. 20, 2005 (Bloomberg) — “Harvard University President Lawrence H. Summers issued his third apology for remarks he made last week that scholars in the U.S. said was a message women lack the ability to excel at math and science. In the statement, issued late yesterday, the 50-year-old former U.S. Treasury secretary apologized for the comments, made at an economic conference, while denying he made them.”
http://tinyurl.com/yj97hco
Lets hope he has more luck with the US economy :-)
November 30, 2009 2:38pm – Atlantic Wire
“Larry Summers got involved in a risky investment strategy that lost Harvard University $1.8 billion dollars. Given Summers’s critical placement in President Obama’s economic team, his putative sins as president of the university are drawing scrutiny.”
http://tinyurl.com/yefk6r9
Good piece but watch it with mixing of metaphors — *three* in the first sentence.
“women lack the ability to excel at math and science.”
I remember this news story, but didn’t know it was Summers who said it. One more peice of the puzzle of why Summers is failing.
It’ll be a Republican very cozy with the banks, and the 30 year pendulum swing to the lunatic right will continue. I have the feeling this 20% un/underemployment (of which I personally am now a part, for the moment) will be FOREPLAY compared to what’s coming in the next 5-10 years.
I would like to apply for a job at your firm. In my past career I modeled what my grandparents taught me, that hard work and honesty will be rewarded. I have seen the error of my ways. Though my past work history does not amplify the skills you seek, I think I can excel in stupid, lazy with a few days on the job.
Looking forward to commentary from Simon on today’s announcement of EMU rescue of Greece?
Talk is cheap, talk is misleading. Once I knew a cat. She excelled at making birds sounds, as she approached unwary prey through the bushes.
It’s not just a question of exploiting customers. It is a question that bankers have been given a regalian prerogatives, that of making money. That the bankers are unelected, unsupervised is an aggravating factor. TBTF is still another complication.
Obama is far from full consciousness on the problem posed by banking. So are most economists…
PA
Another plea in the dark, from a hilltop: Your eyes are open. Open them MUCH wider. Our global depression was manufactured. These blogs serve to spread the fear and chaos. They are carefully crafted PRopaganda devices that are part of a large, coordinated campaign. You laugh? You lose.
Ask yourselves a simple question. Are there people in the world who are smarter than most and who believe they possess the skills to run it better than you? Are there people smart enough to launch a massive program that first burns the world economy to the ground, and then builds it back up more “efficiently.”? If you believe that such people exist, and also believe that they have all the means necessary to achieve their goals (especially internet… wow) — total lock on the main stream media, total lock on the most influential social media, et cetera — why would they *not* hatch their plan?
The mechanics are so easy: Give the entire world enough rope to hang itself. Once hung, come in with a pre-engineered infrastructure and consolidate power. Millions of mistrustful, unemployed, hungry citizens are going to be looking for that big helping hand, just as they have in the past on many occasions. In the past, that hand has been the hand of sociopath. Do you think it will be any different this time?
Just consider looking beyond the theatrics, beyond the Kabuki, beyond the “Basel-ine” scenarios.
Your gracious hosts here, Boone and Johnson, were involved with the privatisations in Eastern Europe back in the early 90’s. These are agents of change you are dealing with, not analysts. Please, please wake the heck up.
“The real question, then, is what reforms the administration will fight for that will actually shrink the size of the financial sector, since there is no evidence that the sector will simply shrink by itself.”
They might have a tough time shrinking the financial sector through regulation. The sector’s size is determined by the volume of services it provides. So, to shrink the sector, we either need to get people to borrow less, or to walk away from their existing debts. More effective would be policies to limit the funds available for real borrowing – one way would be to discourage foreign lending that comes from currency mercantilism. This was probably more important than lax regulation in creating the recent asset bubbles.
Chomsky might agree. What is your solution?
Don’t be surprised if Chomsky is part of the problem. I spoke with him during the earliest stages, and several times subsequently. He had no substantive path to follow. He works at MIT, which has had a long, comfortable relationship with the military-industrial complex (cringe using that phrase, but it is what it is). He even poo-poo’d the severity of the implosion, citing mainstream green-shoot shills. Naive? Don’t think so.
If there is an almost complete lock on all the “credible” sources and carriers of information… I really don’t know. How do you fight that? Beyond trying to follow the money, back to the sources, and figuratively chop the head off of what may be a hydra.
Mark Pittman… gone. Natural death? Very possibly, but not a certainty by any means. This guy?
http://docs.google.com/fileview?id=0BxZhBnxeyUjvOGEwZjNlZDktMTdlZS00ZGM3LTk5MGMtODIwNTVkY2EzZDk4&hl=en
Accident? Doesn’t smell like it. When you have people like Murdoch controlling the messages being delivered to the majority of the population, and they’re eating out of his hand… I don’t know. Do you? It would be fighting the Edelmans, the WPP’s… Burson Marstellers… who create their own realities.
I’d characterize it as a cruel joke.
Until Summers is replaced, I have zero faith any of his words mean anything. Enduring the constant anxiety from worrying about his influence is torture.
You are probably aware of the chaos theory? It essentially says that there aren’t smart enough people to handle the planet.
I think that everyone should be a little paranoid, but conspiracy theories only reinforce the system and they consume precious time that could have been consumed in shaping the world to suit ones views.
Wikipedia-level aware.
As long as we’re entertaining paranoia, consider that chaos theory and complexity studies are being used as a lot of mumbo jumbo to cover for mass manipulation.
Take herds of animals, for example. Their movement across a plain would have chaotic, complex features, yes? Can you herd them into a canyon cul-de-sac and slaughter them? Of course you can. This is not rocket science, though it is dressed up to look that way. Remember what we found out about the quants? “Nobel” prizes given to people who treated econ like physics? We got suckered.
I’ve been watching this play progress, day in, day out, for the past 4 years. This is *not* chaotic activity at the root.
Patrice Ayme wrote: February 11, 2010 at 2:16 pm
“Talk is cheap, talk is misleading. Once I knew a cat. She excelled at making birds sounds, as she approached unwary prey through the bushes.”
William Shakespeare wrote:
“All the world’s a stage,
And all the men and women merely players:
They have their exits and their entrances;
And one man in his time plays many parts.”
http://en.wikipedia.org/wiki/William_Shakespeare
Eurocitizen wrote: February 11, 2010 at 4:16 pm
“You are probably aware of the chaos theory?
Yes.
Asset preservation would be a worthy topic to explore since we are undergoing an economic phase transition.
Edge of chaos (Phase Transition)
“In the sciences in general, the phrase has come to refer to a metaphor that some physical, biological, economic and social systems operate in a region between order and either complete randomness or chaos, where the complexity is maximal.”
http://en.wikipedia.org/wiki/Edge_of_chaos
I think our banking systems weakness relies in part to our societal “best interest” to keep them up and running. Everytime we socialize losses and offer implicit guarantees to TBTF banks, we perpetuate sickness in the institutions. Certain practices are allowed to continue without much consequence. Eventually, this fact has caused bank’s business model to make a phase shift in how they derive profits. It has become an enormous opacity machine and the only way they derive profit is through making common services that could be commodities more complex. I think Summers is right that we have hypertrophy at all levels in our finance sector. The problem is they have us by the balls.
The only way to really effect any change is to disrupt the demand side of equation which would take massive public organization with their pocketbooks. Until then, I hope you like overdraft fees and derivatives!
One Free Market System for Wall Street, Another Free Market System for Main Street
February 11, 2010 04:24 PM – Huffington Post – Robert Reich – excerpt
“Washington is paralyzed by snow and partisanship. Nothing is getting done — even as the Great Recession pulls more Americans into its maw.
In the midst of this paralysis, the President was asked about the giant pay packages of Jamie Dimon, CEO of JP Morgan Chase & Co. ($17 mullion for 2009) and Lloyd Blankfein, CEO of Goldman Sachs ($9 million). “First of all, I know both those guys,” Obama said. “They’re very savvy businessmen. And I, like most of the American people, don’t begrudge people success or wealth. That’s part of the free market system.”
Free market system? As I remember it, American taxpayers forked out hundreds of billions to keep JPMorgan, Goldman, and other big Wall Street banks afloat through most of 2009. Had we not done so, Dimon, Blankfein, and most other top executives on Wall Street would not have earned a dime last year. In fact, some would be out on the street, rather than sitting pretty on the Street.
The free market system has been unleashed instead on average Americans. According to real-estate data firm First American CoreLogic, about one-fourth of American households with a mortgage are under water — owing more on their homes than their homes are worth.
….the President needs to demand that Wall Street help homeowners on Main Street. The Obama White House should have made this a condition of getting the giant bailouts in the first place. The least it can do now is to is to make the free market system work for everyone. ”
http://tinyurl.com/yknzqej
Stephen Schwarzman: Bank Bashing Could Destroy The Economic Recovery
2-11-10 04:03 PM – Huffington Post – excerpt
“One of the world’s richest people is once again claiming that bank bashing is preventing the industry from fully recovering — and even from lending. Writing in the Washington Post today, Stephen Schwarzman, founder of the Blackstone Group, argues that it is both unfair and dangerous to blame banks alone for the financial crisis.
Schwarzman’s Op-ed echoed statements he made in Davos last month, when the billionaire defended Wall Street banks, which he said he feared were “feeling insecure” and “attacked”
http://tinyurl.com/yfdpzqn
http://en.wikipedia.org/wiki/Blackstone_Group
http://en.wikipedia.org/wiki/Stephen_A._Schwarzman
Feb. 09, 2010 – Globe & Mail – excerpt
“New York University economist Nouriel Roubini, who led most of his peers in recognizing the gravity of the global financial crisis, has now laid out a troubling scenario in which investors will start applying pressure to the bonds that the U.S. depends on to finance its swelling deficit and debt.
“Today the trouble is in Greece and the euro zone. Tomorrow it could be Ireland, the U.K. or Germany, or the U.S. or Japan,” he told Bloomberg Television on the weekend.
Mr. Roubini doesn’t think the threat is imminent. But he is convinced it’s inevitable that the focus will shift to the United States, perhaps as early as next year.”
http://tinyurl.com/yjpnzs7
To talk about Larry Summers is to talk about a politician, not an economist, and a politician should not be in a position to advice about economics.
The man is a curmudgeon. As a disciple of Rubinomics, he believed in the miracle tool of Rubinomics – out-year budget projections. According to it, this factor controlled economic life – bond prices, mortgage rates, home sales, capital gains, and consumer spending (in that neat order). How easy!. Now he has gone 180 degrees. In a nut shell, the hell with out-year budget projections, you can spend your way out of a recession. Not only a Curmudgeon, but a magician.
He has been wrong before and is now wrong again. He should be fired.
The most important tool of national strategic planning are taxes – long term tax policy. I can not emphasize ‘long-term’ hard enough. Unfortunately, this conflicts with the agenda of the Democratic political party.
How does it do that, and why long-term tax policy has been proven to be the tool of national hegemony? It can not be answered in this space. Let me direct all who care instead to a short but to the point piece entitled……..
“Barack ‘Wrecking-Ball’ Obama keeps Swinging…..Can We Survive’? “Democrat’s Economic Assumption of death”. No, it is not written by Sarah Palin!
At, http://www.robbingamerica.blogspot.com
It is all in a nutshell. And please Larry, resign for the good of America. By the way, take Romer and Geithner with you, they are also politicians.
Anyone who believes in Larry Summers as any kind of credible voice for real financial reform is living in cloud cookoo land. He’s the one person I really can’t possibly believe, but then, I guess any leopard can change his spots, especially one given to politics beyond economic reality, such as Larry. I have a tiny, literally infinitesimally small hope that he actually means what he says. Or, maybe not even that much.
E. Pierce that was one of the worst blogs I have ever read. And how is any of that garbage even remotely related to policies that Obama has introduced except the stimulus? Factually and historically is just way off base. Alot of depressions have followed years of reduced taxation (i.e. the Great Depression and the current one). Obama hasn’t raised taxes at all. The previous administration put us 5.6 trillion more in the hole than when he got in office.
I recently read a post on Bloomberg that all of the companies in the S&P 500 have around 2 trillion of cash on the sidelines. Phillip Morris just bought back 12 billion of their stock because it was undervalued?!?!? What ever happened to capital expenditures to help the business and economy? Instead we get the jobless recovery BS, company stock buy backs, and useless mergers. I believe that capitalism is our best bet for recovery but we have faux capitalism mired with agency costs and waste. In fact, you can even posture that government is actually better at managing themselves than some corporations. Have you ever called your financial institution lately? Talk about long lines…. It takes twenty mins before you talk to a human. And the way the government managed cash for clunkers is making Toyota look like the USSR with the way they are managing their latest recalls. Cash for clunkers was a much more difficult program to administrate as well.
Your argument is tiresome and archaic.
Romer is a politician? Give me a break. Can you point to anything that remotely proves that across the board tax cuts as THE solution and THE solution alone is a long-term fix to an economic recession or depression? Or that they work at all as systemic economic medicine? It seems like we’ve had some pretty comprehensive tax cuts of late that ended up with us in a global recession. How much needs to be cut for this to work?
At one point in his Presidency, Reagan raised taxes and the economy didn’t collapse. Conservatives also didn’t delcare him a redistributive socialist. Clinton raised taxes and the economy didn’t collapse. Clinton was labeled a redistributive tax and spend liberal {although he balanced the budget} and his raising of taxes was deemed economic suicide and a jobs killer by Republicans at the time – none of this happened. Obama is pushing to repeal the Bush tax cuts, affecting 2% of the country the most, whose lifestyle/etc isn’t impacted by these rates resetting regardless {unless you consider not buying a new luxury car or item affecting someone}. This is tired BS. There has to be something more to offer than ‘tax cuts’.
How do you all explain the healthiest of healthy middle classes from post WWII America through the ’80’s {when the decline started… odd how that coincides with Reagan’s voodoo economic policies} in the midst of super high tax rates relative to today? I just don’t get it.
There are schools and think tanks pushing the same sh-t over and over and over again without looking at what is happening in reality, rather, not owning up to the destruction their ideas foster for society as a whole. Ayn Rands descriptions of the slow industrial rot of America comes to mind when I think of the current affairs of our nation… except in her vision, and Conservatives, this is the result of the ‘moochers’ and ‘government intervention stifling captains of industry’ whilst in reality we’ve had quite a run of the free-est market in America’s history and the country has achieved her vision of rust belt towns and shut down factories – her end result has happened but her diagnosis of what caused this was completely opposite from the truth.
and I’m referring to Ayn Rand’s descriptions of industry collapse in Atlas Shrugged in case it wasn’t obvious.
Stock buy-backs are a preferred way of distributing profits to shareholders, essentially exchanging ordinary income for capital gains, and giving shareholders the choice of whether or not to realize the capital gains to boot.
More tax cuts! And worthless piles of clothes like Scott Brown! That’ll fix it!
I think that the shape of the herd may exhibit chaotic behavior, but not the movement. It’s not likely that chaos is mumbo jumbo as it clearly appears in nature.
“Lobbying by insurers and banks including Morgan Stanley may eliminate a proposed new standard that would make retail brokers more accountable to their clients.
Tim Johnson, the South Dakota Democrat in line to become the next chairman of the Senate Banking Committee, is circulating a proposal that would drop the so-called fiduciary standard for brokers from the panel’s reform package, according to a copy obtained by Bloomberg News. Johnson instead proposes that the U.S. Securities and Exchange Commission conduct an 18- month study to see if there’s need for a new broker standard.”
http://www.bloomberg.com/apps/news?pid=20601109&sid=an6z6yomeOG0&pos=15
Bought and paid for, no reform here. Brokers get to cheat their customers by selling them products that they turn around and short. Why would anyone but stock from a broker?
If they are serious, they must come up with a plan that better aligns the overall size of the financial industry with its contribution to society. For that to happen, they will need to understand and articulate how we got from a point at which that alignment seemed reasonable, to where we are today where 60% of the industry is insured from failure by our government.
For starters, if you have responsibility for something, it means you own it, which means we tax payers basically own the banking industry. The oddity is that the government obtains no upside from that responsibility, with employees obtaining most of the benefits. If ever there was a system ripe for hypertrophy, a state owned business with no checks for responsibility by its employees ranks at the top.
So, as a beginning only, simply putting responsibility back into appropriate alignment, or the government actually receiving its fair share for the responsibility that it has, either one, would stand as a statement that the politicians and their technocrats are serious.
Now are they really serious? Now from what I have seen, every politician out there has run as fast as possible from starting that conversation with the public.
DWN
Shape vs movement, check.
Mumbo Jumbo: it’s not the chaos itself that’s mumbo jumbo, but the verbiage and equations and graphs that are used to obfuscate some very simple non-chaotic activity. Not a problem to accept that chaos exists in nature unless you’re stuck to a very mechanistic view.
Regulation has a long and proven history of corruption and failure. The latest is exemplified by the Bloomberg headline: “Regulators Hired by Toyota Helped Halt Invesigations”
http://www.bloomberg.com/apps/news?pid=20601109&sid=aUqI6LJ5jtU8&pos=10
We dont need more regulation of financial institutions, as called for by Summers.
The financial structure must be changed so that big banks no longer feed off the taxpayer, whether it be subsidies or bailouts.